The creation and resolution of firm-specific uncertainty: Evidence from the impacts of legal contingency disclosure on implied volatility

• Main Authors: Hsin-Yi Huang, 黃馨儀
• Other Authors: 王泰昌
• Format: Others
• Language: en_US
• Published: 2017
• Online Access: http://ndltd.ncl.edu.tw/handle/ct27gq

博士 === 國立臺灣大學 === 會計學研究所 === 105 === This paper investigates the effect of litigation loss contingency disclosure on market uncertainty. Using implied volatilities from different options maturities, we found that initial disclosure of a lawsuit in footnotes to financial statements is positively related to stock market volatility, implying that traders revise their beliefs when responding to this unexpected information. We further tested and, after controlling for the attributable effects of earnings surprise, found that market uncertainty regarding firm value decreases as managers initially mention the recognition of loss in legal contingency disclosures. This result implies that information provided in litigation loss contingency disclosures helps to resolve market uncertainty because traders are highly uncertain about firm value before it is issued. Overall, our study provides evidence that while initial disclosure of a lawsuit increases market uncertainty, the disclosure of recognition of loss contingency helps to resolve investor uncertainty about underlying firm value.